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Volatility fund draws huge put spread

Chris McKhann (chris.mckhann@optionmonster.com)

A huge put spread tops today's option activity in the iPath S&P 500 VIX Short-Term Futures Note as volatility bounces.

optionMONSTER systems show that a trader sold 29,925 May Weekly 18 puts for the bid price of $0.06. Those options expire at the end of this week. At the same time, the trader bought the same number of May Weekly May 17.50 puts that expire in 24 days for the ask price of $0.51. The volume in each strike was above previous open interest, indicating new activity.

This diagonal spread is using the sale of the nearer-term options to slightly offset the cost of those longer-term puts. More traders use puts in the VXX to take advantage of structural issues that eat away at the value of the fund during normal times. (See our Education section)

This can be seen in the fact that its overall open interest in puts is twice that of calls. The note is based on the two nearest-month VIX futures, which usually carry a premium to the spot volatility index.

The VXX is up fractionally this morning at $19.20, not far from its all-time lows of two weeks ago. The note has already seen 174,000 options change hands this morning as volume continues to trend higher in this product.

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